Market Probing Doug Kass' Bottom Theory

Earlier today, enthused by the idiotic futures meltup, Doug Kass of theStreet.com sent out the following tweet: "i am sticking with my forecast that we saw a
yearly market bottom last week.. coming up.. hello darkness my old
friend $$" which was sent on the heels of this one from July "i beleive today
will mark a classic bottom $$." The market is now about to probe said bottom theory as volume picks up. Keep in mind- bottoms are a rounding process, although the classical bottom has now been penetrated.

Just another add them to the notch list of permabulls who will hold all the way down to new S&P bottoms. These folks have never seen what a modern day depression looks like but I can assure them it will be equally as bad as the 1st great depression yet more modern in appearance making it more difficult to recognize. After the coming wealth wipeout in the stock market im looking for 500k+ job loss as the norm.

We'll be celebrating "bottoms" for quite some time to come! My guess has been that the "bottom calls" will begin to proliferate at a frequency of every 3-5 weeks as we plumb lower. Bottoms up, Doug Kass!

" These folks have never seen what a modern day depression looks like.."

And the guy with the printing press is going to make sure they see inflation - more inflation - and hyperinflation long before his successor will let anyone see what a modern day depression looks like.

The German stock market went from 70 to 26,000,000 during a similar period. Best not to get caught on the wrong side of that trade for philosophical reasons.

Yeah but I think Ben is starting to realize he cannot print enough to cause inflation. The deflationary pressures from so many bubbles on top of bubbles and globalization has made it near impossible to compensate for the deflation.

Ben can end this deflation in a weekend if he chooses. Just charge a fee for bank reserves held by the FED rather than pay interest. M1 will go through the roof. Ben has holstered his gun but still has lots of bullets.

Yessiree- but Ben has to time it right, much closer to the elections, not waste his bullets during summer doldrums - throw just enuff at the bitch to keep the crash outta play, then after Labor Day - moon....

Please explain to me in more detail Dr. I like to learn. Sounds like negative interest rate is what you are implying. That ever been done? I would not say possible since we all know the Federal Reserve and wall street have now become more powerful than all 3 branches and are immune from such bothersomes as constitutionality.

I can appreciate the the difficulty in comprehending negative interest rates, after all it defies common logic. However, these are uncommon times and some have called this the new normal. The FED has the ability to create cash out of thin air and due to the econ theory Ben subscribes to, he will do anything to fight deflation. He is on record stating he would drop cash from helicopters if need be. Dropping Benjamin's from a helicopter everyday will create inflation since most will spend this money (unless everyone grabed the cash and immediatly stuffed it in thier mattress and not deposited in a bank, but this is unlikely). I agree, negative interest rates seem strange and most people think it can't exist, but why not? Charging a fee on reserves could be Ben's helicopter.

I agree, although lots of dollar digits (DD's, or double D's) have been newly minted, they are kept in shiny uncirculated condition due to holding as reserves at the FED. When I speak about charging a fee, I am talking about the FED kick starting the velocity by shoving all that money back into circulation.

"...but I think Ben is starting to realize he cannot print enough to cause inflation. The deflationary pressures from so many bubbles on top of bubbles and globalization has made it near impossible to compensate for the deflation."

I agree 100% with this perspective. The HUGE diff. b/t 20's Germany & the US today is globalization and the decline of national sovereignty. In a relatively closed system (like a national economy in the 20's) it is EASY to inflate/hyperinflate. In a relatively open system (today's global economy sans regulation) consumer sentiment is FAR more powerful than the printing press. BB is printing in a black hole.

If an indefinite, utterly ineffective ZIRP policy from the world's de facto CB (the Fed) is not absolute evidence of BB/Fed insignificance, then I don't know what is.

In a global fiat economy, real estate is the canary in the coal mine... if real estate continues to deflate, the other asset classes MUST follow. RE is the ultimate measure of consumer sentiment & solvency.

One caveat... certain "commodities" necessary for life/commerce will run contrary to the broader deflationary trend.

Long story short, equity/capital cannot meaningfully appreciate (beyond the occasional manipulation rally) if RE is still looking for a bottom. It's just that simple. So long as RE continues to fall, all equity/capital rallies should be shorted, IMO.

Well, you seem to presume that a CB will behave traditionally by only purchasing government securities as the means to stem deflationary expectations (as is the case with Japan and the Fed doing everything wrong the 30s).

The key is to understand what Ben's helicopter argument actually means in practice (turns out it's not actually dropping bales of cash into city streets from a helicopter, but it's not far off either): the CB simply bids up whatever kinds of asset classes it sees fit to stem deflationary expectations (as they arise).

Read the following (skip the math) and see if you still feel as confident that a traditional debt deflation scenario will play out with the Fed 2.0 behind the wheel:

Note the various citations to Bernanke in the piece--these guys are all in VERY similar schools of thought.

Once you start to understand their mentality, you realize that they already have most of the tools they need. What they really lack is the legal authority to place bids any asset class (or do they?), ultimately resulting in asset price floor.

Remember that deflation spirals because of expectations that prices will fall without limit, so if a CB employs practices discussed in the linked piece, then the spiral can be broken.

All the Hugh Hendrys out there are right about the scale of debt deflation in the hopper, but they underestimate the Fed 2.0, completely dismissing its long-term ability to inject trillions (yes, a 't') into the system without it ending up as bank reserves, given enough time. So with this in mind, one can even argue that rising gold prices actually help the Fed out (in the short/medium term) because it helps stem deflationary expectations.

Faced with national crisis and debt scare, is it too far-fetched to consider a future where the Fed will directly or indirectly give lines of free credit to households? Oh, and don't forget the part where BofA, JPM, Citi, etc partner with the Fed to distribute this new supply of 'emergency' credit. Think the sheeple of the US are going to fight that one? Their alternative is to see the establishment that they feed and skim upon, violently shatter and spark a nasty reboot. Anyway, this is just an example/demo scenario, but I think it conveys what lengths the parasites will go to in order keep their hosts alive.

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FD: long gold, long silver (for the above reasoning that the Fed 2.0 will use all means necessary to support asset prices to offset debt deflation in the coming quarters/years)

The IMFWPA piece dosn't change my perspective at all. Why? Because Fed/CB direct bidding for assets is already happening, and it's not working. So they'll do more of it, on an unprecedented scale? Big deal. They are/will be ALONE in the marketplace, as NOT ONE private capital interest will participate in such markets - which is exactly what markets look like today... QE supporting prices via "indirect" bids, and computers trading the intraday micro-trends. No sane person/wealth will buy and risk being caught "holding the bag".

IMO, this Fed 2.0 is already in action and is failing (of course).

QE/monetary policy of CBs has been meaningless for over two years now, and I can see ZERO evidence that this can/will change. When massive QE/printing does finally trickle down to the street (prob. years from now), the deflationary collapse will already have done it's damage, and the fiat FRNs will transition from marginal utility (as a currency) to worthless (hyperinflation) within days/weeks... such will be the short and sweet demise of the FRN as we know it...

I'm not suggesting that direct or indirect price support of assets will be successful at all in the long run. In the short run, the Fed's actions *have* been successful in that the prices of various asset classes amidst massive volatility and liquidity swings have been relatively stable (for now). We of course need to look no further of recapitalization of the big banks thanks to the Fed buying all their junk from them at mark-to-myth value and all that cash being used to support US debt prices.

You may want to watch out for your terminology... QE *hasn't* been "meaningless" in that it's staved off massive collapse for a short time. Am I saying this is a good thing? No. I'm just saying their actions have been with intention and a there's a plan--just a shadowy plan that makes the rich richer and will make the fall worse for the average American. Obviously, because most Americans don't have even a basic understanding of economics or finance, only a handful of Americans (i.e. us folks here on zh) even have the capacity to see how things could play out.

As far as I can tell, we're in full agreement. The artificial price support of various asset classes continues to this day via direct and indirect newly issued currency. It's just tiresome to hear "deflationary collapse" when it's so clear the Fed has every means and channel ready and waiting to support asset prices. Of course the Fed will become a larger and larger player as things deteriorate--just because there's fewer and fewer market participants doesn't mean prices are guaranteed to do down. Frankly, my money is on the side who (a) can legally generate as much cash as needed, and (b) benefits from the status quo staying intact.

"It's just tiresome to hear "deflationary collapse" when it's so clear the Fed has every channel ready and waiting to support asset prices."

Except real estate. That's the key. As RE sinks, other asset classes are bound to follow, regardless of monetary policy. The term 'deflationary collapse' is entirely appropriate, esp. if one views RE as the baseline...

Well, if you consider that 30 year rates are so low (for now), that banks have serious play with who and what mortgage assets they foreclose on (triggering price realization), and that interest tax credits will persist then there's price buoyancy right there.

Plus, another federal housing subsidy is likely to be just around the corner so if/when that comes, that's equivalent to an across-the-board price level increase.

Let's not forget that the Fed already bought massive piles of real estate paper to (a) save its banks and (b) prevent forced selling of real estate assets (a price support measure). In fact, all that junk paper the Fed bought from the big banks at par? Yeah, those are real estate assets.

So I'd say it's clear the Fed has and will remain committed to real estate price level support.

If, as you say, the Fed will remain committed to real estate price level support, then I/we can expect more of the same results... RE asset deflation. The Fed's "commitment" is has failed and continues to fail.

Again, all evidence points to an ineffective/powerless Fed. None of the commitment or support demonstrated by CBs has worked thus far, and one might reasonably conclude that more of the same tools/playbook will yield more of the same results. I see no rationale for sudden reversal/change in the effectiveness of failed policy.

If, as you say, the Fed will remain committed to real estate price level support, then I/we can expect more of the same results... RE asset deflation. The Fed's "commitment" is has failed and continues to fail.

By your logic, the median home price would be unchanged if the Fed wouldn't have intervened by providing artificial demand for mortgage-backed paper. Please stop being argumentative and nonsensical.

Who said anything about inflation? Devaluation and inflation are very separate things, plus the word "inflation" is an entirely clunky, coarse word that refers to a broad list of phenomena.

A CB can simply conduct debt monitization to offset debt deflation pressures, leading to (relatively stable) price levels while the ratio of total paper assets to hard assets continues to increase (i.e. devaluation). It's my working thesis that is what has been occurring over the past 18 months and what will continue to occur until a new spark occurs, igniting a global sovereign debt crisis as the world discovers there's not enough future productivity to repay global aggregate debt levels.

Since 10:15 this morning, the market has been clearly manipulated by.....sellers. If the SEC wasn't so busy probing Doug Kass bottom, maybe they could do something about it, like get somebody to stick save this market toward the close for a nice 100 point up day. After all, Wall Street leads Main Street and all that stuff straight from Doug's bottom.

tyler... if you get a chance, please post this video. this is a must see film and if we, all of us, don't organize and do something about this... we have completely lost our backbone as a nation. thank you. http://vidreel.com/video/OTAyNTQ4/

my gut tells me he is probably right. a rally to 1300 is in the cards, but that isn't the end of the bear market by a long shot, you just need to look at the 2006-8 time frame to see the volatility. Additionally forces weighing on the market, EU debt, and GOM, are both past the crisis point for investors, it looks as though the worst may be out of the way. And furthermore this market is neither free nor efficient, which means someone is in charge, and it isn't the inmates. unemployment is bad but not getting worse, the housing market has another leg down, perhaps this is it. we have a new general in Afghanistan and we will negotiate our way out.

finally this is an important election year, and the GOP plan is to give Obama enough rope to lynch himself, (sorry) but that's what they're thinking. hey it worked for the Dems and Bush. So here we go, Camptown races five miles long, all DOO DAH DAY..

Election? Never happen. Theyre not going to feed themselves up (incumbents) for the worst ass kicking in history. Before the month is out we'll have invaded both Iran AND Venezuella (military family member inside info) and no election will take place. By Nov, we'll be in some kind of suspended animation state of world war/martial law no one can quite label because its never happened before.

Kass should have stopped talking after kinda sorta calling the bottom in March '09. This appears to be a Hail Mary damage control prediction that will either restore his reputation or send it further over the cliff.

Watching the PPT fight is like watching an animal that got hit by a car and did not die on impact. It just flails about on its last breath until it cannot breath anymore. So I guess that means the PPT will fight until we reach 100% taxation rates to fund this farce.

" Yeah but I think Ben is starting to realize he cannot print enough to cause inflation."

John, Ben can "print" an infinite amount of money and credit just on his coffee break. He can "cause" all the inflation he wants to, and given how much he hates deflation/depression.....I think he will.

It is the most important investment call of our lifetimes:

1. Will Bernanke stay the course and respond to every piece of deflationary news with more QE?

2. Or will he fold his tent and have history judge him a failure?

3. Or will he suddenly convert to Austrian economics and recommend the Fed be disbanded?

What a fucking moron? Disaster is near as we approach the waterfall meltdown in equities. Western society as we know it is about to go down the plug hole. Obama, Geitner, morons. Rebublicans = morons. Bernanke = idiot. Get your bags of wheat.